As the impact of the Coronavirus (COVID-19) continues to spiral, there are several legal issues which pension scheme trustees need to consider. In this article we focus on the potential impact of force majeure provisions within service provider contracts. We also link to a wider briefing on the impact of the pandemic on commercial relationships.
Most service level agreements which trustees have entered into will include a force majeure clause.
This is a clause which will entitle the service provider to suspend or modify the performance of its obligations under the contract where certain events occur which make performance of those obligations in the required manner either difficult or impossible.
Trustees should be reviewing their key contracts, such as investment and administration agreements, in order to assess the force majeure provisions.
What constitutes force majeure?
Under Irish or English law, force majeure must be defined and agreed under the contract. However, under French law or other civil law systems, force majeure is defined under the applicable Civil Code, which prescribes when force majeure will apply. Therefore, trustees should be particularly wary of any contracts they may have in place with entities based in civil law jurisdictions, which may be governed by local law.
The Government measures announced today, and likely follow on measures here and across the globe, could potentially trigger a force majeure claim by a service provider.
For contracts under Irish and English law, the ability for the service provider to do this will be determined by the specific wording of the clause.
Some force majeure clauses are event specific, and will list a set of defined events which will constitute force majeure events. Commonly listed events will include natural disasters or catastrophes such as earthquakes or volcanic eruptions; plagues or epidemics; armed conflict; embargos; nationwide strikes; acts of Government etc.
Clearly COVID-19 and the measures introduced to counteract it could fall under one of these heads.
Other force majeure clauses are not event specific and instead define a set of criteria which must be met for the event to be considered a force majeure event. For example, an event which is beyond the reasonable control of the parties, cannot be reasonably foreseen by the parties and cannot be overcome through the exercise of reasonable efforts.
Triggering force majeure clauses
The extent to which the parties’ must use reasonable or best endeavours to overcome the impact of the force majeure event is a critical point which should be checked. This would cover issues such as the relevant party’s obligations to seek to deliver services remotely or electronically, for instance.
In general, a party claiming force majeure is only excused to the extent and for so long as it is unable to perform the contract as a result of the force majeure event. However, the degree of impact necessary to trigger force majeure will again depend on the specific wording of the contract and the applicable governing law.
Other relevant issues are whether the party claiming force majeure needs to satisfy a notification obligation to the other party before relying on such a claim.
Generally speaking, the burden of proof will be on the party seeking to rely on force majeure provisions to prove that the event used as a justification for invoking the clause has the effect of preventing that party from performing its obligations under the contract, or of delaying such performance beyond required timeframes.
Obviously there are two sides to this story, and where there is a valid basis for a force majeure claim, the party impacted by it is entitled to exercise their rights under the contract. Needless to say, the willingness of both parties to seek to mitigate the impact of the force majeure event, and to co-operate with each other in seeking to address it, will be critical to achieving best outcomes.
What action can trustees take?
Our advice to trustees is to:
- confirm what force majeure provisions apply under their key service provider contracts;
- speak to their service providers about the potential / likelihood of service interruptions and their business continuity and mitigation strategies; and
- consider your scheme’s own business continuity plans (in particular in respect of member communications) in the event that service providers are unable to deliver critical services (e.g. pensioner payroll).
For further information in relation to the impact of COVID-19 please also see:
- Click here for a commentary by our Employment Law team on COVID-19 in the workplace - Employment guidance update;
- Click here for a commentary from our Commercial Contracts team on the broader implications of COV-19 in relation to commercial contracts.